Time to raise the rent?

March 21, 2014

It’s the busiest time of the year for property managers as they deal with the post-summer holiday’s annual spike in demand for rental property. Leading this annual migration are flocks of new and returning tertiary sector students as well as newly-hatched graduates seeking a perch within commutable distance of their new workplaces. But it also includes many established workers, who use a new year to mark a change in their work and nesting arrangements.

As a result, it’s also the time when smart property investors schedule rent reviews and/or make a property available for rent. With the strong seasonal demand, the chances of securing a suitable tenant and/or effect a rent rise are at their greatest.

Property investors considering a rent increase always face a quandary: raise the rent in order to increase income but risk losing a tenant and potentially face weeks of a vacant property until a replacement is found. Get the timing and quantum wrong and raising the rent can cost thousands of dollars in lost income.

Will the current market bear a rent rise and if so, by how much? According to recent statistics from the Australian Bureau of Statistics, property investors may need to tread carefully. Overall, rents rose just 3% over the year to December 2013 across our capital cities. Moreover the trend isn’t the property investor’s friend at the moment. After a strong run for rental growth that peaked at a 20-year high of 8.4% in December 2008, rental growth has been going south ever since.

In fact, the aggregated December 2013 figure is somewhat flattering to many of our cities. Other than Darwin (rents up by 8.4%) Perth (rents up by 5.8%) and Sydney (up 3.4%), our capital cities are struggling to post growth that keeps pace with the latest 2.7% inflation rate.

Syd

Mel

Bris

Ade

Per

Hob

Dar

Can

Dec 13 % annual growth

3.4

2.0

2.1

2.4

5.8

1.0

8.4

0.4

With a typical renter in a capital city paying around $300 a week (based on a rough approximation and extrapolation of 2011 Census data), December’s weak rental numbers suggest that today’s property investor will be doing well if they can add another $10 a week to the rent.

We took soundings from property managers in Sydney and Melbourne to see if the reality on the ground matches the sober ABS data.

The Sydney Northern Beaches rental market remains buoyant, according to Carly Collins, Business Development Manager at Cunninghams Property. “Last week we had 35 groups through one of our inspections in Queenscliff.”

Raising rents doesn’t appear to be a major issue. “We review the rent annually for all our properties and it hasn’t been hard to raise the rent in the last couple of years,” Ms Collins says. “We’ve been recommending an increase of between $10 and $25 a week, depending on the property.”

Robyn Lukey, Manager, Property Management for Hocking Stuart St Kilda, is upbeat about the Melbourne inner bayside market. “Rental returns for the last six months have been steadily improving,” she advises. “This January has been exceptionally busy, compared to Jan 2013.”

Both agents expect their respective markets to stay strong. “I anticipate the strong growth to continue for the next few months,” says Ms Lukey. “January, February and March are usually the busiest time of the year, and especially in St Kilda. Everyone wants to live in this area when the sun is shining!”

However, Ms Lukey does identify a factor that is undoubtedly an issue in many of our capital cities. “The vacancy rates were a little higher than usual over the 12 months with a lot of development around the St Kilda area providing an oversupply of apartments,” she says.

Both agents warn that property investors have to work to win tenants’ hearts. “Tenants expectations are high and are expecting properties to be modern and regularly updated,” says Ms Lukey. “Landlords need to budget for regular maintenance and refurbishment. With many new developments being built, even though the apartments are quite small these days, they do have all the bells and whistles that tenants are looking for.”

Ms Collins agrees. “Presentation is everything, particularly with respect to kitchens and bathrooms. How modern and functional these two rooms are will effectively determine how much rent you will receive,” she says. ”If a property needs a coat of paint – paint it! Present the property as fresh and make sure your marketing is spot on. Use professional photography. Market it to the standard you would use to sell the property.”

Our take-out from the blend of ABS data, the insights from the property managers and from our own experience is that the rental market is performing reasonably, but that you can’t rely on population growth to deliver ‘lazy’ year-in, year out inflation-busting rental growth. Instead, investors have to be more proactive.

Investors need to load the dice in their favour by investing in property that is located in areas where rental demand is always strong and supply is restricted. But they also need to find a good property manager – one who can counsel them about presentation and rent setting, and is also skilled at keeping the tenant satisfied.

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